The Sin of US ethanol subsidies

The US is a net exporter of food, and a net importer (directly and indirectly) of motor fuels.

So with current high gasoline prices we get a higher price for our food surplus by burning up part of it for fuel.

Even if the energy used in creating the ethanol is somewhat more than the energy produced, the energy used is generally coming from lower cost and domestically produced sources such as coal. And the fuel burned in our cars replaces gasoline- a much higher cost energy that we import.

So, bottom line, burning up part of our surplus crops as motor fuel, which drives up food prices world wide, we reduce imports of motor fuels and we get a higher price for the remaining foods we export.

That is, we benefit economically from the global chaos and the likelihood of mass starvation created by this policy.

So it is your opinion that the U.S. is short of farming acreage, and that we now have reached the limits of U.S. food output? And it is your opinion that the entire world has reached the limits of food production, which is why the U.S. turning some of its corn into oil raises all food prices, worldwide?

Sounds a bit suspicious to me. Do you have any data to support these beliefs?

Dave Begotka Reply:April 21st, 2011 at 7:18 am

Well Mr Rodger Malcolm Mitchell your kind of a nubie here so I will not bore you with 14 paragraphs of collage level fluffy circle talk, here is my Youtube channel you need to watch

“How to fix the Economy”
“How to make the switch to honest”
“Illuminati”
“Truth”

They are all around 2 minute vids and get to the point “How to fix health care” is a good one too.

We are almost to “Eat Thy Neighbor” and that’s why they built DUMBS…….

Dudes when and if we ever get to “Truth” I think we will find that they have been holding some very good alternative energy sources from us………..but if I am wrong I feel I have a dead ringer idea. The water in the deep ocean is compressed and I believe there is a way to mechanically take advantage of it.

“With the amount of interest and money being thrown at it, I am reasonably confident that there will be solutions forthcoming.” Someday, maybe. I hope I’m still alive. Meanwhile, we are using up the oil, so should we not try to save what remains?

Anyway, don’t tell the Tea (formerly Republican) Party we are throwing government money at the problem. They want freedom from government interference.

Thorium nuclear appears to be better way to go than uranium or plutonium.

There are promising attempts to create petro from biosources like algae.

Ethanol can also be produced from biomass other than food, such what would otherwise be considered waste.

The research in alternatives is fast and furious. With the amount of interest and money being thrown at it, I am reasonably confident that there will be solutions forthcoming.

But the low hanging fruit is conservation and passive solar design.

One of the problems is that vested interests promote centralized and consolidated solutions they can control and profit from, whereas there are a lot of decentralized and distributed solutions available, as anyone who has lived off the grid knows. Remember the ’70s books, Producing Your Own Power? This stuff has been around awhile.

IF (big “IF”), producing ethanol from corn requires less energy than is contained in the alcohol it creates, then the U.S. saves non-renewable energy by converting renewable corn to alcohol.

IF (big “IF”) this increases food prices, we are talking about non-renewable energy vs renewable dollars. A hundred years from now we will run out of oil, but never will run out of dollars. In the U.S. at least, inflation seems to be right where the Fed wants it to be.

Other nations, that experience inflation, have massive internal problems at fault; they should stop pointing at the price of U.S. corn.

I know it is de rigueur to scoff at U.S. energy policy (or the lack thereof), and particularly the use of corn for energy, but I’ve not read or heard of an “acceptable” policy other than “Use less.” Nuclear power would help, though the same scoffers are against it, and even then, it would not eliminate the need for oil.

Bottom line, the need for oil is not going to disappear, and ways to create oil must be developed. Perhaps corn is a first, clumsy step, but it is a step, which is more than can be said of wind and solar power, which even our great grandchildren will count as about 5% of our energy needs.

Ummm. How about no government subsidies, a $1 per gallon tax on gasoline to account for the externalities, no tariffs on sugar cane-based ethanol from Brazil (which is about 4x as efficient to make as corn-based ethanol in the US), moving forward with a nuclear waste storage depot at Yucca mountain, and a saner, cost-benefit analysis based approach to drilling offshore, to drilling in ANWR, and to the development of oil shale in Colorado?

I’m not altogether sure why people think we have an energy problem anyway (aside from stupid policies that should be fixed). I guess we’ve been spoiled by $1 per gallon gasoline, but we’ll adjust nicely to $5 or $6 per gallon gasoline soon enough.

“We have an energy problem, because the supply of oil is finite. We need a way to make more than we use.”

The wonderful thing about free markets is that there is never a shortage. There are only changes in price. We use oil because it is ridiculously cheap, and it has been an amazing boon for the world which allowed technology and civilization to make more advancements in the last hundred years than during the rest of human history prior.

It’s amazing to think about, but before oil was discovered underground, the world considered it worthwhile to hunt and kill 100K whales per year for their oil (perhaps 50 barrels each on average).

As easily accessible reserves are drained, the price of oil will rise, thereby making less easily accessible reserves economical. At each price point, there will be enough oil to meet world demand. I can pretty much guarantee this. I don’t doubt that 30 years from now, we will get a much lower percentage of our energy from oil, as well as a lower percentage of our petrochemicals from oil. I don’t see the big deal. As the price rises, other forms of energy become competitive — nuclear, solar, tidal, wind, hydro, geothermal, biofuel. The only thing that will have happened is that the price rose for something that represents less than 10% of our GDP (and shrinking).

It is important for the government to allow this process to play out naturally, without putting it’s thumb on the scale to favor one type of energy source over another (I concede this is difficult, but we’re doing some things that are pretty obviously silly.)

Of course I don’t think the government should be subsidizing oil in any way. This includes charging royalties that are far too low for drilling on federal land (royalties should be determined in a competitive bidding process). And I support taxes and regulations that mitigate externalities.

That being said, I think a lot of the so-called tax breaks for “big oil” that people complain about are not really intentional tax breaks. They’re loopholes in the tax code that are extremely difficult (perhaps impossible) to close. Such loopholes exist as a consequence of the income-based system of taxation we have in this country. Income is an amorphous and ambiguous term. As such, it is possible for smart lawyers and accountants to minimize taxable income in high-tax jurisdictions, especially when you’re dealing with a complex multi-national corporation with hundreds of subsidiaries.

As I have consistently argued, the solution to the problem of people not having enough money to buy sufficient amounts of food (or any necessity) is to give those people enough money.

The other solutions — subsidies for food production; subsidies for food consumption; taxes on biofuel production; taxes on biofuel consumption; or quotas on biofuel production (not really different from a tax – a quota is an infinite tax) — create distortions for the market and are non-optimal.

I don’t want anybody to starve because of food being burned up for fuel, but, to tell you the truth, I don’t want anybody to starve period.

I realize that you’re not going to solve world hunger by doling out money, but the other solutions are worse. World hunger is really more of a local governance problem than a problem of not enough food production, although I’ll admit that a rapid rise in food prices as we’ve experienced exacerbates the problem because the local government leaders are reluctant to accept a cut in their income to feed their people.

Ironically, the distribution of subsidized or free food to poor areas of the world actually discourages local production of food by making local production even more unprofitable. If the people in those poor areas were given money instead (and — big if — the local government didn’t steal it from them), then local food production could be profitable.

understood on providing funds for the food. I suppose if it got more expensive than the fuel we’d stop burning it.

interesting dynamic

Mario Reply:April 20th, 2011 at 11:37 pm

“If any reader of this blog has a better energy plan, let’s hear it.”

yeah…major US government (new deal-ish) initiative of installing electrical outlets for cars at EVERY GAS STATION in America…every gas station. This way consumers can actually drive a freaking electric car across the country and not worry about the damn thing dying on them in Nevada or Arkansas!!! LOL!!! Once consumers see they can actually use an electric JUST LIKE they use their current oil-based cars then they will buy them…and when they demand them the producers will feel MUCH MORE CONFIDENT about supplying them. At this point it’s just a jerk-me off throw away they are doing with the electric car to make it seem like they care and they are doing something…they’re not.

It’s so PATHETIC the type of “electric” cars they are putting out today…we can do better…we must do better…

the pluggable hybrid is close enough- there are relatively few trips that would cause the gas motor to kick in

Mario Reply:April 21st, 2011 at 11:05 am

I hear ya Neil…now I am no scientist AT ALL (I’m an accountant, lit. major, artist, and trader/investor) but considering who we are and the technology we have today in our industries…I am SURE that we can re-charge a car with electric power in 5 minutes. Remember also that we could have 2 or more “outlets” on the car to double or even triple the influx of power entering the car as well.

The electrical grid is true but back on the “campaign trail” Obama talked about updating our grid b/c we need to…remember the “terrorist-induced” brown-outs in NYC a few years back? The grid is dated from gee…around the time of the new deal (go figure!!?!?!). We need a new one.

That’s actually the other reason why I think this initiative is such a good idea…it will create a whole new niche market for jobs in the electric automobile industry and it will re-stimulate jobs that are needed to update the grid…while they’re down there fixing the grid they might as well add in public wi-fi or at least DSL too!!!

As someone on the ground in Iowa, I can say that the state is run by agribusiness. The family farm was pretty much eradicated in the ’80’s. Small farms are no longer profitable. Agribusiness is huge, and the lobby is all-powerful in the state. This has nothing to do with the early primaries here. Ordinary Iowans could care less about the ethanol subsidy. It is not on their radar as a political issue. Where it shows up is in the political contributions to candidates.

The Saudis are setting the price of oil and the alternative fuel stocks which were supposed to provide some elasticity in price and demand for OPEC oil. While US is taking criticism for using our surplus grains as fuel, Only 4 years ago the US was being villainized for dumping grain on the world markets. The EU, Canada, Argentina and Brazil complained to the WTO about US corn subsidies and low prices. African nations complained that cheap grains dumped on their markets disrupted their own production. CARE rejected the entire USAID scheme and said “dumping of vast supplies of subsidised American food surpluses’ onto African markets is causing very unfair competition for millions of struggling, small-scale African farmers all across the continent, including in South Africa.” The millions of people buying corn, gold and oil futures in their retirement plans and pension funds as an alternative to avoid low interest rates may have a bit of responsibility in this matter as well.

In presidential campaigns, the long shots tend to say what the contenders dare not. So there was onetime Louisiana Gov. Buddy Roemer, in early March, telling a group of Iowans, “I will eliminate the ethanol subsidy.” Silence.

What do any of those presidential candidates know, with their seasoned political advisors and their well-funded pollsters? Tom Hickey actually lives in Iowa, and he says the voters there don’t care about ethanol. Of course, Tom doesn’t seem to leave his computer very often, so maybe he’s missing something…

Not necessary to get out and talk to a lot of people, ESM. Just listen to and watch the local (Iowa City) and regional (Cedar Rapids, second largest city) news and real the local and regional papers including the Des Moines Register. Ethanol is not a political topic in Iowa.

And you won’t hear any of the candidates coming to Iowa talking publicly about the ethanol subsidy, although privately they will be promising the powers that be here that they won’t be touching it. If you notice, this is one of the few things that the Iowa senators (Conservative GOP Grassley and liberal Dem Harkin) agree on.

Matt Franko Reply:April 20th, 2011 at 9:23 pm

ESM, Tom,

From what Ive heard (& seen at a local microbrewery) you can still use the distillers grain (byproduct of the ethanol process) residuals to feed livestock. Ive an acquaintance who has a PhD in bovine gastro. and he has confirmed this. Its good for cattle and hogs and other animals but is albeit trickier than straight corn feed (too much protein or something). But it can still be used for feed after the sugars are removed (but results in less fat on the animal which is desired, etc..). So it is not a total loss.

This old (PhD) hippie swears by ethanol:http://alcoholcanbeagas.com/
Excerpt:” If all the sewage in the US were sent to constructed marshes, the 3141 counties would need only 6360 acres each to fulfill all of our foreseeable transportation fuel needs, both gasoline and diesel, at 200 billion gallons per year. This equals 1.4% of our agricultural land”. No irrigation or chemical fertilizers would be needed. Additionally, they provide a profitable way to clean up rivers, streams and oceans by detoxifying chemicals and removing heavy metals like mercury which is evaporated out through the leaves.”

We have numerous constructed marshes here over the last 20 years in the Chesapeake Bay watershed (to control storm runoff from the hard surfaces) I’d like to see some pilot projects in this area by the govt. they could use the low areas between divided highways, areas inside the cloverleaf interchanges, etc… use “harvesters” instead of mowers.. lookout you OPEC SOBs! Resp,

Matt Franko Reply:April 21st, 2011 at 8:03 am

To continue on this: this paper examines the BTU generated per one BTU of fossil fuels, a twist on the plain EROEI propaganda studies.http://www.extension.iastate.edu/agdm/articles/hof/HofJuly07.html
Cellulose ethanol has the highest yield at 10.31 compared to gasoline at 0.81 and then with the gasoline you have the ‘externalities’.

Propaganda studies that purport to show a lower yield from ethanol often include the “cost” of energy from the sun in the calculations… LOL! Resp,

Nobody has seriously included the cost of energy from the sun in ethanol calculations. And I think there is general consensus that corn ethanol saves oil, which reduces our imports of oil. The problem is with the overall economics. There are other costs besides how many BTUs of fossil fuel are consumed in the process of creating a BTU of ethanol.

I’ve actually made similar arguments about hybrid cars like the Prius. My liberal friends in California get irate when I tell them that the gasoline cost savings of a Prius over its entire life does not come close to matching the total cost of buying and owning a Prius over its entire life. They say, indignantly, “I don’t care about saving money; I care about saving the environment.” Of course, my fundamental point is that the net money tells you about the total resources consumed in the entire cycle. All kinds of other resources are consumed in the manufacture and use and maintenance of a Prius. Gasoline is just one of them. I think that hybrid cars are clearly a net negative for the world, just like corn ethanol production. Maybe some day that will change, and when it does, we’ll know from the unsubsidized prices.

By the way, I thought this was an interesting statistic from your link:

“For example, the 2005 Flexible Fuel Ford Taurus has a 15 percent reduction in mileage (Popular Mechanics) when operated on E85 as compared to straight gasoline.”

So a blend of 15% ethanol, 85% gasoline gets 15% worse gas mileage than 100% gasoline? Did the author see any problem with reporting that?

Matt Franko Reply:April 22nd, 2011 at 1:08 pm

ESM,
No doubts you will never get your money back on the extra battery expense in the Prius… a while back A123 Systems came out with a Li-Ion aftermarket kit for Prius that got you 30-40 miles out of the garage each day. I called the local Toyota dealer that sold and installed them and they cost $11,000 !.. I think you would have to drive 100s of k miles on the kWhours to break even or something. Without govt intervention (tax breaks or like you say jacking up the fuel tax) it doesnt look like it will ever make “economic” sense to do any of these alt fuels stuff. OPEC is in control because we let them be, I’d like to see them “cut off”.

And right when we put the E85 in our cars it kills the mileage. As far as the gas mileage, the E85’s dont get the best mileage because the engines are not optimized for ethanol (compression issues with the flex fuel engines) but rather gasoline. Again advantage OPEC.

The studies I was referring to are the direct EROEI comparisons. Some of those look at the Energy Returned on Energy Invested. It has been claimed by some that we have to include the energy “invested” from the sun that makes the sugars in the corn. And the IA State paper looks at how much BTUs we get out while using “fossil” fuels in the process of delivering the final product to the pump, which is I think a better way to look at it. We would do well to use Nat Gas to distill cellulostic ethanol at small localized county level distilleries.

Look if you believe oil (petroleum) is from dead plants or dinosaurs ie “fossil” fuels, then the same amount of energy should be in the plants before they somehow got buried deep under the surface of the earth and turned black under pressure…. as you know you cant get rid of energy.

ESM check out what the guy (I called a hippie) David Blume has written about at the site I linked above (alcoholcanbeagas.com), he I believe is a PhD and makes some interesting claims about going over to alcohol. He may be left of Lenin but I dont care on this one. The info he comes up with looks good to me if true. Resp,

I did look at the other link. I couldn’t find anything obviously wrong with his numbers, but it certainly sounds too good to be true. I’m hopeful (and somewhat confident) that 2nd, 3rd, and 4th generation biofuels will be economical in the not-too-distant future. I think biofuels will end up displacing oil before nuclear (i.e. fission), fusion, or any other renewables do.

It’s even more unstable than that, Warren. The pattern of what’s exported/imported also matters.

We export mostly feed grain, and now import the majority of the raw produce that we consume daily – meaning fresh greens, veggies & fruits. Not one single of our 50+ states or territories is food-independent anymore. With even moderate disruptions in long distance shipping lanes we would have basic food shortages everywhere, and it would take several years to readjust.

On top of that is an equally insidious pattern. By concentrating food production, we’re coincidentally reducing the genetic variance of most staple items, from iceberg lettuce to the commodity strains of everything from broccoli to strawberries. That also reducing resiliency, and increases susceptibility to disruptions.

Example: A good chunk of the recent decline in honeybees was caused by genetic inbreeding that had gotten out of hand on a truly global scale.

These subtleties come back to bite us periodically, all because we have unchecked policy-inbreeding among increasingly isolated command & control classes. That’s a well known phenomenon in all system sciences, military planning, or engineering control systems – but apparently not taught in political science, on Wall St., & especially not at the Harvard economics department. (or anywhere in economics, for that matter)